The Gold Bubble

I was at a dinner party the other evening when the gentleman to my right asked me what I did for a living. Upon hearing that I ran a wealth management firm he said “I suppose this is a good time to invest in gold.” That’s not a surprising comment since gold prices recently topped $1,500 per ounce.

I promptly informed my unsuspecting dinner companion that gold is not an investment. Investments create value and income over time. Stocks, bonds, real estate, and businesses would all qualify. Buying gold is speculating on price like any other commodity. The only reason gold is selling for $1,500 per ounce is that a buyer thinks they will eventually be able to sell it to someone else for a higher price. Gold prices move with supply and demand. There is a lot of demand for gold because we have just come through a recession, and people are fearful about the size of government debt. Not surprisingly, the supply of gold is also on the increase as mining companies attempt to seize this opportunity to cash in at record prices. A report from the Economist Intelligence Unit (EIU) showed that gold production reached record levels in 2009 and 2010 production was expected to be 30% higher still. The supply of gold is clearly on the increase in a big way. It won’t take much of a drop in demand for the price of gold to reverse direction.

I’m not trying to predict the price of gold or the end of the gold bubble. If you have been buying gold you are speculating on price and participating in the latest investment fad. Warren Buffet said, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” Today, those chasing gold should be fearful.

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